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Operation Twist is an economic plan implemented by the United States in September 2011. It was inspired by a similar action that the country utilized with some success during the 1960s. The basic goal of Operation Twist is to encourage economic growth and investment by driving down long-term interest rates. The government attempts to meet this goal by selling off large amounts of short-term debt and reinvesting this money in long-term debt or investment instruments. Using this strategy, the United States government believes it is possible to spur investment in business and industry while keeping long-term investments like homes as affordable as possible for the average American.
The United States first implemented Operation Twist in 1961. This action was named for a dance craze known as the twist, which was extremely popular during that time period. Long-term analysis shows that this original Operation Twist was relatively successful at spurring economic growth and confidence. In September 2011, the United States government announced that they would be repeating Operation Twist in an effort to encourage economic investment and jump-start a slow economy.
The premise behind Operation Twist is relatively simple. Under this plan, the government sells off its short-term investment instruments and purchases long-term investments like bonds. In a balanced economy, this action would flood the market with short-term investment opportunities, resulting in a reduction in short-term interest rates. With interest rates close to zero in late 2011 in the United States, this operation should have little to no effect on short-term rates.
By purchasing large quantities of long-term investment instruments, the government hopes to drive down long-term interest rates. This makes mortgages, bonds and other long-term investment vehicles appear more affordable and attractive to potential investors, which may encourage them to invest. This strategy is designed to help the average citizen better afford to purchase a home by instilling confidence and keeping mortgage rates low. It's also intended to encourage investment by businesses, which is an important component for long-term economic growth.
Operation Twist allows the government to encourage investment without making official changes in interest rates. It also eliminates the need to print more money, which results in inflation. This strategy simply involves swapping short-term debt for long-term debt, which means that the total level of debt that the government is taking on is the same. This means that there is little added risk, and costs for debt repayment remain virtually the same.